Exclusive - Cisco cuts ties to China's ZTE after Iran probe

LONDON | By Steve Stecklow

LONDON (Reuters) - Cisco Systems Inc. has ended a longstanding sales partnership with ZTE Corp after an internal investigation into allegations that the Chinese telecommunications equipment maker sold Cisco networking gear to Iran.

Cisco's probe followed stories by Reuters in March and April that documented how Shenzhen, China-based ZTE had sold banned computer equipment from Cisco and other U.S. companies to Iran's largest telecom firm. ZTE also agreed last year to ship millions of dollars worth of additional U.S. tech products, including Cisco switches, to a unit of the consortium that controls the telecom firm.

The stories sparked internal probes by the companies involved, as well as investigations by the U.S. Commerce Department, a congressional committee, and the Federal Bureau of Investigation. ZTE's general counsel at its Texas-based subsidiary alleged that the parent company plotted a cover-up, including possibly shredding documents, after the first Reuters story broke. The FBI has launched a criminal probe into the allegations.

The U.S. House of Representatives' Intelligence Committee said in a draft of a report to be released Monday that ZTE and fellow Chinese telecom equipment maker Huawei Technologies Co. Ltd should be shut out of the U.S. market because potential Chinese state influence on them poses a security threat. Both companies deny the allegation.

David Dai Shu, a ZTE spokesman, said of Cisco's decision to cut ties: "ZTE is highly concerned with the matter and is communicating with Cisco. At the same time, ZTE is actively cooperating with the U.S. government about the probe to Iran. We believe it will be properly addressed."

In a recent interview, John Chambers, Cisco's chief executive, declined to discuss the results of the company's investigation of ZTE's sales to Iran. But he said Cisco doesn't "tolerate any direct or indirect" sales of its equipment to embargoed countries such as Iran. "And when that occurs, we step up and deal with it very firmly. So I think you can assume that you will not see that happen again."

THE IRAN CONNECTION

Cisco and ZTE partnered for the past seven years in a relationship that was at times rocky, according to a former Cisco executive with knowledge of the matter.

Related Coverage

ZTE described the initial partnership as an effort to develop business opportunities in China and Asia Pacific, excluding Japan.

The partnership expanded about five years ago when Cisco began viewing ZTE as a means to combat Huawei, the world's second-biggest maker of telecoms equipment by revenue after Sweden's Ericsson. Huawei had been beating out Cisco in emerging markets by offering significantly cheaper products.

Part of Cisco's strategy, the former Cisco executive said, was "we would license technology to ZTE and they would produce equipment locally, and we could therefore have a range of equipment in the marketplace that would be cost-competitive with Huawei."

ZTE was "reasonably successful" in reselling Cisco products inside China, where it was well entrenched in the marketplace, the former executive said. But the plan to develop projects jointly, and offer them in markets such as Africa, floundered. The two companies couldn't get their teams to collaborate and clashed over the U.S. market, this person said.

"ZTE wanted to bring things to market in the U.S. with our help. We really didn't want them to do that," the former executive said.

By 2010, the partnership had basically ended, although ZTE continued as an authorised distributor and reseller of Cisco products, according to a person familiar with the matter. The ZTE spokesman did not comment on its relationship with Cisco.

ZTE has continued to do business in Iran where American-made tech products long have been subject to U.S. sanctions. A parts list dated July 2011 for an equipment contract between ZTE and Telecommunication Co of Iran (TCI) included several Cisco switches. ZTE later agreed to sell five Cisco switches to a unit of the consortium that controls TCI, according to documents reviewed by Reuters.

After the Reuters report in March, ZTE, China's second largest telecom equipment maker, said it would "curtail" its business with Iran.

Ashley Kyle Yablon, ZTE's Texas-based general counsel, gave the FBI an affidavit in May in which he alleged the company had plotted to cover up the Iran sales. The affidavit became public in July.

ZTE recently placed Yablon on administrative leave, according to his attorney, Tom Mills.